Bizarre cellphone pricing baffles economists

Cellphone companies offer strange pricing that baffles economists, while U.S. consumers spend more and more each month on mobile phones.

Apple and AT&T's $199 iPhones are on sales upswing and U.S. consumers won't have it any other way. $399 iPhones with a $20 a month fee ended up costing $4o less, however sales were slacking. Cellphone companies' strange price plans are confusing as well. Barry Nalebuff, an economics professor at the Yale School of Management says, "You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents."

Confusing? Entirely.

Here are a few more confusing pricing schemes:

• Phone companies charge 20 cents per text message...double what they were in past years. They cost the phone company less than a penny to deliver.
• Sprint offered free calling to any mobile number, and customers then switch to more expensive plans.
• Web is provided for a flat rate on iPhones and BlackBerries.
  

So why are U.S. consumers buying? It's all about instant gratification. A New York Times article reports, "Consumers often put immediate gratification and the avoidance of unpleasant surprises above their long-term interests."

This behavior is difficult for economists to predict. In other countries, consumers buy a phone and then purchase minutes. When they run out of minutes, they buy more. No contracts, no ridiculous charges, and no economists searching for a model that can't be found.

U.S. consumers' need for instant gratification pressures cellphone companies to subsidize phones in order to increase sales. The iPhone that is $199 meanwhile costs AT&T $550. The increased monthly charge is in order to cover the subsidy.

Philip Marshall, an anayst for the Yankee Group says, "Service providers don't have a good measure for their costs. They don't have the ability to say if they are going to make money" on any particular plan. So basically, phone companies want to get the most money they can possibly get out of you and hope that they have made enough money to cover their costs.